NPS Active vs Auto Choice: What Works In Volatile Markets?

NPS lets Indians aged 18-70 invest in bonds, government securities, or equity, with active or auto asset allocation and pension benefits at age 60. The National Pension Scheme (NPS) is a government-backed retirement scheme, allowing salaried professionals to save for after-job life. At a time of market volatility, when performance has remained muted for the past six months to a year, there are concerns about overexposure to equities among a section of subscribers. NPS provides people with the option of investing in corporate bonds, government securities or equity. If you are an Indian citizen between the age of 18 to 70 years, you can invest in NPS. Under this scheme, you can contribute regularly during your working age. After this, at the age of 60, you can withdraw a part of the accumulated money and can get regular pension income from the remaining amount. NPS gives two options to the subscriber to invest in the scheme, auto and active. An auto choice is an option in which the subscribers give the fund manager the freedom to invest their money wherever they want, whereas, in active choice, the subscriber tells assets his money is to be invested. What is an active choice in NPS? This option is available to NPS members who want to select their own asset blend. Subscribers can select the ratio in which their money will be spread across different asset classes under this choice. In other words, you have a say in the assets you own. Even within this option, there are restrictions because a maximum of 75% can be allocated to stocks. This maximum was increased a few years ago from 50%. What is an auto choice in NPS? There are three funds in NPS for auto allocation (NPS auto choice option). There is a Default Moderate Life Cycle Fund. In this, the maximum equity investment can be up to 50 per cent. The second is the Conservative Life Cycle Fund, which allows only up to 25% investment in equities. The third is the Aggressive Life Cycle Fund in which you can invest up to 75% in equity. If you want to choose the active choice, consider three things before doing so. First, are they able to do the right capital allocation by valuing different asset classes? Secondly, if the subscriber has investments elsewhere and NPS is only a part of his overall portfolio, can they go for active choice? Thirdly, if there is a need to change the NPS portfolio in future, you will do so. If you consider yourself true on these three conditions, then you should choose the active choice option to invest in NPS. Which Is Better Choice? “In volatile phases, this design (auto option) can be a big advantage. There is no temptation to time the market. There is no last-minute panic exit. The portfolio quietly adjusts on its own," Yadav added. On the other hand, Active Choice offers greater flexibility. Yadav explained that it allows investors to decide how much to allocate to equity, corporate bonds, and government securities within prescribed limits. According to him, this option suits investors who understand markets and are comfortable managing asset allocation decisions. “For example, when interest rates soften, increasing exposure to government securities may enhance returns. After sharp equity corrections, staying invested or even raising equity allocation can strengthen long-term compounding," he said.